Non-bank captive auto finance is one of the few credit portfolios that has grown in Canada over the past year at a robust pace versus the same period in 2012 (balances increased by 9.4 per cent from $50.8 Billion to $55.5 Billion).
With 84 month and 96 month terms (7 and 8 years, you’re reading this right 7 and 8 years) now being offered by dealers and banks alike it’s no wonder. I’m beginning to feel a sense of US housing market bubble redux, just in a different asset class. Bad debt however recognizes no asset class boundaries. Presently in Canada the average car loan term is 62 months.
Loans like these are eerily reminiscent of a time when people stateside were being offered similar fabulous deals, but on their homes. We all watched the U.S. mortgage market crater, as houses plunged underwater. The most troubling part; real estate historically has appreciated, or at least held its own…not so much for cars. So what’s the big deal we’re only talking cars. Housing on the other hand is typically a consumer’s largest expense, not to mention asset. Who cares if the auto market craters in a similar fashion?
Let’s do the math. New vehicles typically depreciate at a rate of 15% to 20% per year. At this rate the $55.5 Billion (plus interest) we spent on shiny new rides will leave us with assets in our driveways worth only roughly $18 Billion! Nothing like making a purchase for something that is going to be worth 67.5% less than what we paid for it 5 years earlier.
But what’s $40 Billion or so evaporating from consumer balance sheets once considering that the grand sum of total household assets in Canada are in the trillions? Most would say not much, almost inconsequential. Perhaps, but my only question is will we be better off or worse off for it five years out?
Will our irrational exuberance in auto finance today have a negative trickle-down effect somehow somewhere down the line in the economy? I guess we’ll just have to keep on Truckin’ while keeping an eye on our rear view mirrors.